Cayman Islands domiciled investment funds historically have faced challenges when seeking to invest into Indian capital markets. One of the major hurdles in this regard has been addressed by the 10 June 2009 admission of the Cayman Islands Monetary Authority as an ordinary (ie full) member of the International Organisation of Securities Commissions.

By way of background, the IOSCO Objectives and Principles of Securities Regulation were endorsed by its member regulators of various securities and futures markets in 1998, and generally are viewed by securities regulators as the key international benchmark on sound principles and practices for securities regulation. Currently, IOSCO members regulate the vast majority of the world’s securities markets.

To access the Indian markets, an investment fund must register as a Foreign Institutional Investor (FII) with The Securities and Exchange Board of India (SEBI). In the past, since CIMA was not a member of IOSCO, SEBI often engaged in extensive due diligence and inquiries before allowing registration of a Cayman fund as a FII. As a result, few Cayman Islands funds have registered with SEBI. CIMA’s admission to IOSCO looks set to change this trend in favour of Cayman Islands funds.

The timing could not be better. With emerging markets competing to attract liquidity, the Cayman Islands, with over 9,000 CIMA registered investment funds, a proven track record with investors and an excellent and sophisticated service infrastructure, has a great deal to offer India and investors that wish to access its markets.

One remaining challenge is that the Cayman Islands do not currently have a tax treaty with India. Mauritius, on the other hand, has long been the preferred jurisdiction for investment into India as a consequence of the favourable double taxation agreement between those countries, contributing to around 44 per cent of foreign direct investment into India.

Investment funds from non-tax treaty jurisdictions have developed a structure involving a wholly owned Mauritius subsidiary for purposes of Indian investment. Typically, this structure requires a Cayman Islands (or other non-treaty jurisdiction) investment fund to register with SEBI as a FII. The Mauritius subsidiary fund will then be registered with SEBI as a sub-account of the FII, permitting it to invest directly in Indian securities via SEBI. The Mauritius fund will be set up as a Global Business Company Category 1 that is resident in Mauritius for tax purposes. As a Mauritius tax resident, this fund is subject to tax on income at the flat rate of 15 per cent. However, it is entitled to claim a credit for foreign tax on income not derived from Mauritius against the Mauritius tax payable, resulting in an effective tax rate generally ranging between 3 per cent and nil. As a tax resident GBC1 the fund is also entitled to take advantage of Mauritius’ network of tax treaties, including the Mauritius-India DTAA.

Under the Mauritius-India DTAA, capital gains realised from the sale of Indian securities held by a Mauritius fund will be exempt from taxes in India and taxable in Mauritius, provided the Mauritius fund does not have a permanent establishment in India. Since Mauritius does not impose any capital gains tax on its residents, such gains would ultimately not be liable to any taxation. Additionally, there are no withholding taxes on dividends and proceeds paid by the Mauritius fund to its shareholders.

Dennis Ryan is an attorney in Conyers’ Dubai office and has worked extensively in all areas of corporate and commercial law, focusing on corporate finance, investment vehicles, restructuring, property and real estate development. Prior to joining the Dubai office, Dennis practiced in the Cayman Islands office of Conyers Dill & Pearman.